O’Reilly Stock Analysis: Will Missed Earnings Prevent an O’Reilly Stock Rally?

This article was written by David Berger, a Financial Analyst at I Know First and Finance student at the University of Michigan’s Ross School of Business

O’Reilly Stock Analysis: Will Missed Earnings Prevent an O’Reilly Stock Rally?


  • Future Earnings Potential
  • Share Repurchase Program
  • Increasing Market for Auto Parts
  • I Know First Bullish Forecast for ORLY

O'Reilly Auto Parts Stock Analysis

O’Reilly Automotive Inc. (ORLY) is an auto parts retailer that provides tools, equipment, and supplies to do-it-yourself customers and professional service providers. 58% of customers are do-it-yourself customers, and 42% professional service providers. Established in 1957, ORLY has over 4,800 stores in 47 states across the country. ORLY owns the third largest market share in the U.S. at 15.3%, slightly behind Advanced Auto Parts Inc. and AutoZone Inc.

While ORLY’s recent performance may seem subpar, there are reasons to be optimistic looking forward. We maintain a bullish forecast for O’Reilly Automotive Inc. for the following reasons: future earnings potential, its share repurchasing program, and the increasing market for auto parts.

Future Earnings Potential:

O'Reilly Auto Parts Stock Analysis

On the surface, ORLY’s Q1 2017 earnings missed expectations and were a disappointment. Reported earnings per share (EPS) was $2.60, well below the Wall Street consensus of $2.88, and below O’Reilly’s earlier prediction of $2.78-$2.88. Revenue also missed Wall Street’s expectations of $2.22 billion, with a reported $2.16 billion in revenue for the quarter.

Despite this, revenue still increased by 2.9% year over year (YOY) from $2.1 billion in Q1 of 2016. This YOY growth is nearly in line with O’Reilly’s stated goal of increasing revenue 3%-5% per year. Stores that have been open for over a year also saw a 0.8% increase in revenue YOY. ORLY spent $7 million more on property and plant (PP&E) purchases YOY, proving that ORLY anticipates growth and increased profits. Additionally, ORLY’s forecasted EPS of $3.10-$3.20 for Q2 2017 is right in line with Wall Street’s expectation of $3.15. So while investors and Wall Street were unhappy with ORLY’s earnings, ORLY is still a growing company that will continue to increase revenue.

Share Repurchase Program:

O'Reilly Auto Parts Stock Analysis

On May 10, 2017, O’Reilly announced a $1 billion share buyback program over the next three years. This brings the total of share buybacks to $8.75 billion. Share repurchases have become a habit for O’Reilly recently. In Q1 of 2017, O’Reilly bought back $474.58 million worth of shares, and a whopping $1.445 billion in Q4 of 2016. ORLY has increased its authorized share buyback program total each of the past 2 years, including $750 million in 2016.

O’Reilly believes investors and Wall Street are undervaluing the company. This 3 year window provides evidence that the company expects its long-term plan to improve profit margins and increase its number of stores. During Q1 of 2017, O’Reilly opened an additional 60 stores, now totaling 4,888 locations nationally. These new locations typically have lower revenue than older stores, meaning O’Reilly sees revenues steadily increasing as the company continues buying property and opening stores. As ORLY perpetually invests in property, bottom line profit decreases, and that is why O’Reilly is undervalued. Therefore, this buyback should show investors that ORLY trusts itself to increase market share and revenue.

Increasing Market for Auto Parts:

O'Reilly Auto Parts Stock Analysis

The auto part industry is growing in the US every year. There are multiple reasons for this, one of which is that people are driving more often and for longer distances. According to the U.S. Department of Transportation, the number of miles driven in 2016 increased 2.4%, and 2017 is already on pace for a 2.0% jump.  O’Reilly’s brand recognition will capitalize on this opportunity and take advantage of newfound customers.

Additionally, the average age of a car in the U.S. has risen from 9.5 years to 11.5 years from 2005-2015. This increased car life is attributed to better manufacturing and engines. But as cars begin to age, their original warranties begin to expire. Once expired, the driver is on his/her own to fix any issues with his vehicle. These vehicles require more frequent check-ups and scheduled maintenance, which is important for auto part manufacturers. There is no reason to believe that consumers will stop buying higher quality vehicles, thus there will be a higher demand for O’Reilly’s services.

Finally, one of the main factors in decreased vehicle traffic is unemployment. When unemployment is high, consumers drive less often because of the costs of gas and car maintenance. But unemployment in the U.S. is decreasing, as unemployment went down to 4.7% at the end of 2016 and 4.5% through March 2017. As society continues trending towards lower unemployment, consumers will respond by driving more often. With this in mind, O’Reilly has three straightforward avenues toward beating expectations and driving the stock price upward.

Although O’Reilly missed earnings for Q1 2017, I maintain a bullish outlook on the stock. A high potential for future earnings, its share repurchasing program, and an increasing market for auto parts resonate with I Know First’s bullish algorithm forecast on O’Reilly as a long-term investment.

I Know First Bullish Forecast

Below is I Know First’s latest algorithm forecast released as of today on June 11th, 2017.  Today’s forecast rates O’Reilly as a buy.  The prediction strength increases as the time moves from one month, to three months, to a full year.  This is because ORLY continues to open stores and will increase revenue and net income with each new location.

The forecast is color-coded, where green indicates a bullish signal while red indicates a bearish signal. Brighter greens signify that the algorithm is very bullish as it does at the top of this forecast. The signal is the number in the middle of the box.  It is also the predicted direction (not a specific number or target price) for that asset. The predictability is the historical correlation between the prediction and the actual market movements. Thus, the signal represents the forecast strength of the prediction, while the predictability represents the level of confidence.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.